If we make decision based on NPV or IRR or PI, we should accept this project. This is because the project has a positive NPV, its PI over 1 and the IRR is more than the required rate of return. All of this factors mean that the project can actually benefit the company. However, since your company required that all the projects have a payback period of 2 years or less and a discounted payback period of 2.5 years or less, I recommend that you should reject this particular project. This is because the exact Payback Period and discounted Payback Period are 4.62 years and 5.58 years, which are far beyond the requirements. Therefore, the project should be reject.

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I also make some sensitivity analysis and scenario analysis as you required. In the sensitivity analysis, you can see that the change of the price per unit has the greatest impact on the NPV. If the price per unit decreases by 10%, the NPV will be -694,837.57 and the IRR will be 7.59%, which means the project will make the company lose money on this investment. Based on your requirements, I also do a scenario analysis.

You can see it in the appendix. Since you just require the NPV and IRR results, the others are not show there, you should notice that if you pretty sure that the good case may happen, you can accept the project. This is because in the best case, all your company’s requirements will be achieved and the NPV and IRR of the project will increase a lot (The NPV will be 14,907,810.60 and the IRR will be 54.06%). However, if the worst case come true, your company will suffer a lot since the NPV will be -7,701,774.67 and the IRR will be -23.67%. So, I recommend that you should consider this situation seriously. If you think the best case have great possibility to happen, you should undertake the project immediately.

Last, as your requirements, I also do the NPV break-even analysis based on the unit sales. The result is also listed in

Page 2 Memo for financial analysis Essay

the appendix. The NPV break-even point is 210,208.54 which can be regard as 210,209. This means that if everything goes as you expect, the NPV of the project will be 0 when you sell 210,209 units of your product in each year. In another word, if you can sell 210,209 units each year and other things do not change (such as the price, variable cost etc.), you can be indifference about this project. This is because you will not earn or lose money on this project.

You can find the details of the calculation in the appendix excel. I would be pleased to discuss any of these issues with you in greater detail if you require further information.

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